AFC Gamma Q3 2024 Earnings Call Transcript

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November 13, 2024

Key Takeaways

  • Positive Sentiment: Since spinning off its commercial real estate portfolio, AFC originated approximately $59 million in Q3 and $116 million year-to-date, surpassing its $100 million origination target and maintaining a pipeline of over $400 million.
  • Positive Sentiment: AFC generated distributable earnings of $0.35 per share in Q3 and paid its first post-spin dividend of $0.33 per share, having distributed $6.98 in dividends since going public under a policy targeting 85–100% of distributable earnings.
  • Positive Sentiment: The portfolio’s weighted average yield to maturity stands at 18%, with 90% of loans fixed-rate or carrying floors ≥4.5%, positioning AFC to benefit in a falling interest rate environment across its $338 million loan book.
  • Negative Sentiment: Following the recent Republican sweep, AFC expects broader federal cannabis reform—such as rescheduling and the SAFE Banking Act—to advance more slowly, keeping capital access in the sector constrained.
  • Positive Sentiment: During Q3, AFC raised approximately $12.2 million through its ATM program at an average price of $10.39 per share, accretively bolstering its capital base and preserving over $75 million in liquidity for future deployments.
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Earnings Conference Call
AFC Gamma Q3 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, and welcome to Advanced Flower Capital's Third Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you all for joining AFC's earnings call for the quarter ended September 30, 2024. I'm joined this morning by Robin Tannebaum, our President and Chief Investment Officer Daniel Neville, our Chief Executive Officer and Brandon Hensel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our October 14, 2024 press release and is posted on the Investor Relations portion of AFC's website at advancedflowercapital.com, along with our Q3 earnings release and investor presentation. Today's conference call includes forward looking statements and projections that reflect the company's current views with respect to, among other things, anticipated market developments, portfolio yield and financial performance in 2024 and beyond.

Speaker 1

These statements are subject to inherent uncertainties in predicting future results. Please refer to AFC's most recent periodic filings with the SEC for certain conditions and significant factors that could cause actual results to differ materially from these forward looking statements and projections. During this call, we will refer to distributable earnings, which is a non GAAP financial measure. Reconciliations to net income, the most comparable GAAP measure to distributable earnings can be found in AFC's earnings release and investor presentation available on AFC's website. Today's call will begin with Robin providing some introductory remarks.

Speaker 1

Dan will then provide an overview of our Q3 2024 performance and an update on the cannabis industry. Finally, Brandon will conclude with a summary of our financial results before we open the lines for Q and A. With that, I will now turn the call over to President and CEO CIO, excuse me, Robin Tanenbaum.

Speaker 2

Thanks, Gabriel, and good morning to all our investors and analysts that have joined us today. I'm thrilled to share that we've had a very active quarter. Following the spin off of our commercial real estate portfolio on July 9, we have operated as a pure play cannabis mortgage REIT. Since the start of the Q3, we have originated approximately $59,000,000 in new loans and we've now exceeded our $100,000,000 origination target for the year, reaching $116,000,000 in total new originations so far. This milestone is not just a number.

Speaker 2

It represents our renewed commitment to provide the cannabis sector with timely, flexible capital at a moment when the industry needs it. Dan will dive deeper into the new deals we closed during the Q3. We've deployed capital into promising cannabis 3.0 operators and continue to see attractive opportunities for additional investments. As of November 1, we had an active pipeline of over $400,000,000 of potential deals. We are pleased to have the capital to support our existing borrowers and fund future opportunities.

Speaker 2

During the quarter, we raised capital accretively through our ATM stock offering program, which will allow us to continue supporting this rapidly evolving industry. With the Republican sweep, we expect access to capital in the cannabis sector to remain scarce. While President-elect Trump has demonstrated some support for cannabis, broader cannabis legislation may not be the Republican administration's top priority. We believe that any progress will move at a measured rate. Rescheduling to Schedule 3 is still expected to advance, although at a slower pace than it would under a Democratic administration.

Speaker 2

The path for the SAFE Banking Act appears more challenging as the momentum needed to push it forward may not be strong enough. With the prospect of progress at the federal level slowing down, we believe that there will be favorable conditions for AFC to deploy capital into deals with strong risk adjusted returns over the medium term. With that, I'll turn it over to Dan, who will discuss our Q3 performance and what lies ahead.

Speaker 3

Thanks, Robin, and good morning, everyone. This quarter saw strong performance and key achievements in our origination efforts. I'll begin with an overview of our results, followed by an update on our recent deals and some commentary on the cannabis industry before concluding. For the Q3, AFC generated distributable earnings of $0.35 per basic weighted average share of common stock. As a reminder, distributable earnings is the primary metric our Board of Directors considers when declaring AFC's quarterly dividend.

Speaker 3

The Board declared our first post spin dividend of $0.33 per share, which was paid on October 15, 2024 to shareholders of record as of September 30, 2024. Since going public, we have generated distributable earnings that met or exceeded our dividend each quarter and paid out $6.98 in dividends per share. When I joined AFC last November, one of my key priorities was to reinvigorate the origination engine. I'm proud to say we made significant strides in this area. During the Q3, we closed several key deals, including an $11,000,000 senior secured credit facility for private company Q, a vertically integrated operator in Georgia.

Speaker 3

We also expanded senior secured facilities to 2 existing borrowers by a total of $7,300,000 to support their continued growth. Additionally, subsequent to quarter end, we closed a $41,000,000 senior secured credit facility for Storey, Maryland, a leading vertically integrated operator in Maryland's adult use cannabis market. These deals reflect our continued focus on partnering with strong operators in limited license states and further diversifying our portfolio. Cannabis industry remains capital intensive, acquiring significant investments in cultivation and distribution infrastructure. The demand for debt capital is growing, driven by refinancing activity, adult use and medical expansions and increased M and A across the cannabis sector.

Speaker 3

However, traditional lenders remain cautious and will likely remain so given the election results. With the number of cannabis debt portfolios winding down and only a handful of active lenders remaining, ASC is well positioned to capitalize on the opportunities in cannabis lending. As the 1st Nasdaq listed cannabis lender and a leading debt provider in this space, we have built a diversified portfolio across limited license states with favorable supply demand dynamics. Our ability to provide flexible funding enables us to remain at the forefront of the industry's growth. Our current portfolio has a weighted average yield to maturity of 18%.

Speaker 3

We remain focused on continuing to deploy capital into solid credits with attractive risk adjusted returns. Strategy is clear, move up the quality curve while continuing to target a portfolio yielding in the mid to high teen IRRs. As of November 1, 2024, 67% of outstanding principal was comprised of fixed rate loans and floating rate loans with floors greater than or equal to the prevailing sulfur rate of 4.61%. An additional 23% of outstanding principal is 11 bps above their floor with 4.5 percent sulfur floors. Simplifying that down, 90% of our portfolio is currently fixed or has a sulfur floor at 4.5% or above.

Speaker 3

Given our high fixed exposure and high sulfur floors, we are very well positioned for a falling interest rate environment. Reflecting on my last year at AFC, I'm incredibly proud of our accomplishments. Since last year, we made substantial progress, exiting, restructuring or securing significant pay downs on 7 key loans. Our disciplined approach has led to approximately $150,000,000 in capital repaid, allowing us to redeploy that capital into new vintage deals with attractive risk adjusted returns. On the origination front, we set the ambitious goal of $100,000,000 in originations and exceeded it, achieving $116,000,000 in new originations across 7 deals to date.

Speaker 3

The spin off of our commercial real estate portfolio marked another milestone, enabling us to operate as a pure play cannabis lender. Finally, we raised capital accretively through our ATM program, which has bolstered our ability to provide timely, flexible capital to the industry. These accomplishments wouldn't have been possible without our team's hard work and dedication and I'm truly grateful for their efforts. As we look ahead, I'm confident we're on track to drive further growth and create long term value for our shareholders. Now I'll turn it over to Brandon to discuss our financial results in more detail.

Speaker 4

Thank you, Dan. For the quarter ended September 30, 2024, we generated net interest income of $8,900,000 and distributable earnings of $7,200,000 or $0.35 per basic weighted average common share and had a GAAP net income of 1,400,000 dollars or $0.06 per basic weighted average common share. As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFC's business. Distributable earnings represents the net income computed in accordance with GAAP, excluding non cash items such as stock compensation expense, any unrealized gains or losses, provision for current expected credit losses also known as CECL, taxable REIT subsidiary income or loss net of dividends and other non cash items recorded in net income or loss for the period. We ended the Q3 of 2024 with $298,700,000 of principal outstanding spread across 13 loans.

Speaker 4

As of September November 1, 2024, our portfolio consisted of $338,000,000 of principal outstanding across 14 loans following the completion of the spin off of our commercial real estate portfolio. The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan was approximately 18% as of September 30, 2024 and November 1, 2024. As of September 30, 2024, we had total assets of $366,600,000 including cash and cash equivalents of $122,200,000 which included $60,000,000 drawn on our line of credit that was subsequently repaid in full on October 1, 2024. Our line of credit provides us with up to $60,000,000 in available funds that can be drawn as needed. During the 3 months ended September 30, 2024, we sold approximately 1,200,000 shares under our at the market offering program at an average price of $10.39 per share, generating net proceeds of approximately $12,200,000 This was accretive to our book value and help bolster our capital base during the quarter.

Speaker 4

As of September 30, 2024, the CECL reserve was $25,300,000 or approximately 10.7 percent of our loans at carrying value, which increased $200,000 from the June 30, 2024 reserve of $25,100,000 During the Q3, we also had an increase in our unrealized losses on loans at fair value of $4,600,000 increasing the current total unrealized loss included on the balance sheet to $19,600,000 As of September 30, 2024, total shareholder equity was 206,100,000 dollars and our book value per share was $9.42 On October 15, 2024, we paid our first post spin dividend of $0.33 per common share for the Q3 to shareholders of record as of September 30, 2024. As a reminder, on an annual basis, our current dividend policy is to pay between 85% 100% of distributable earnings over the year. With that, I will now turn it back over to the operator to start the Q and A.

Operator

Thank you. And our first question comes from the line of Pablo Zuaneck with Zuaneck and Associates.

Speaker 5

Thank you. Good morning. I guess, first of all, congratulations on exceeding your target of $100,000,000 in loan origination for the year. Can you talk about just in terms of modeling, I don't know if you've given guidance for 2025, but is it reasonable to assume that you would have a similar target for 2025? You talked about a pipeline of $400,000,000 that would be like 25% of that being realized.

Speaker 5

Just some color in terms of how to think about this going forward. And again, congratulations on the exiting target. Thanks.

Speaker 3

Thanks, Pablo. So we've talked about having greater than $75,000,000 of liquidity from here. We want to get fully invested, but we also want to make sure that we're cautiously deploying capital into good credits and new vintage loans with solid operators. And so we've judiciously deployed over the course of the year into a number of those credits and you should expect the same in 2025. I think in terms of a target, we'll probably come back with something on the Q4 call.

Speaker 3

But we've got a lot of good things in the pipeline. I'm very pleased with the quality of the things in the pipeline. And given a little bit of the turmoil in the cannabis markets in the election results last Tuesday, we're happy to have dry powder to deploy to new borrowers out there in the space and at attractive risk adjusted returns.

Speaker 5

Okay. Thank you. And just following up on that, if we think about the current earnings season, right, a lot of companies missing estimates, it's challenging out there. Like you said in your prepared remarks, I think Robin, yes, we may get rescheduling, but that may be delayed. So from your perspective, are we compared to 6 months ago, are we into choppier, riskier quarters?

Speaker 5

And that maybe also impacts the way you think about your pipeline and origination loans? Or am I exaggerating the context compared to 6 months ago in terms of the risk of the industry? Thanks.

Speaker 3

So I think if you look at the results thus far, generally speaking, revenue growth has been hard to come by. And the reason is that you have some AU flips like Ohio that was a partial quarter. You have some potentials in the future in terms of PA and Minnesota. But you also have markets that are kind of mature on that AU curve. Illinois, New Jersey on the retail side of things is another one.

Speaker 3

Massachusetts and Michigan, we're probably a year ahead of them in terms of the maturity. And so places where a lot of MSOs have a lot of exposure, Illinois and New Jersey are getting more competitive, particularly on the retail side of things. Now a lot of these companies I think are looking for strategies

Speaker 1

to further

Speaker 3

identify those markets through partnership structures or other strategies to take the existing distribution infrastructure that they have in those states and get more out of it. I think that's a good trend. But you're kind of fighting you have these growth curves on the AU markets and the flips and they're largely being offset by declines in more mature markets. The results, I think you have a little bit of pressure on profitability, but generally speaking, profitability has been pretty decent. Revenue growth hasn't been there.

Speaker 3

I think for us as a debt lender, that's generally a fine place to be in. I think as an equity investor, it's a little more problematic because if you're going to get growth multiples like the industry has historically argued for, you got to have growth. And at least this past quarter, you're not seeing that much growth. And so I think that's why you've seen a reaction in the stocks, a combination of obviously the results themselves, but also AU and Florida failing, which would have been big for a few companies combined with a shift to the right and potentially slowing pace of federal reform.

Speaker 5

Thank you. And let me just use it as a segue for Florida. I don't know if you can comment or in terms of what you are clients that are based in Florida. What type of color are you getting from them? I mean, are we going to see more price competition?

Speaker 5

A lot of companies added capacity in stores. I hear A3 didn't happen. How are you thinking about your Florida exposure? And what type of comments are you getting from your operators there? Thank you.

Speaker 3

Yes. So our Florida exposure is pretty modest, 10% of the portfolio overall. And I would say generally we don't underwrite for the future here, right? Projections in the cannabis industry have been we have a long history of borrowers providing us projections and a lot of them falling well short. So we really underwrite to the current state without AU flips and that's how we underwrote our exposure in Florida, just a medical market and being able to continue to take market share.

Speaker 3

I think in terms of the landscape in Florida, I would much rather be a challenger and somebody who's moving up the growth curve, who has additional white space to fill in and additional market share to gain than an incumbent with a large profit pool. Because the challengers in these type of markets where you're probably looking at 2 more years of stagnation are just on a much better footing than the incumbents with an existing profit pool. And so that's how we view our exposure. I think generally speaking, we're hearing operators are going to button down the hatches. It looks like at least another 2 years, run lean, be aggressive about fulfilling out of their own stores and maximizing profitability.

Speaker 3

And I think that's absolutely the right approach.

Speaker 2

And I think that just to add to Dan's point, the operator that we back here has been very prudent with their capital and did not build out in anticipation of rec. So decided to take the wait and see approach, which as a lender you really appreciate, right? Because now they're as Dan described right sized to attack the market, and also leading from a position of strength versus just having spent a lot of money on building out excess capacity that's not going to be used.

Speaker 5

That's right. Yes. Thank you. Look, one last one. So obviously, you talked about the continued demand and supply imbalance on debt capital on capital in general and probably even more so on the equity side now.

Speaker 5

So you're in a great place. Totally agree with that. So when we hear about this like Uralif recently, a regional bank, I think they refinanced or got a new loan for 7.99 percent interest rate. Are those more like exceptions to the rule? Or are we seeing more region and I've asked this before, but are we seeing more regional banks come in?

Speaker 5

Or like you said before, some are just running down their portfolio? We're getting mixed signals on that front. That's the last question. Thank you.

Speaker 3

I think more coming out or getting more cautious than are coming in. I think you may see people come in and you may get a headline rate to the strongest operators in the space, the GTI facility that they did, I think that is the exception rather than the rule. And generally speaking, people are deemphasizing activity or slowing down activity in the space. And that doesn't mean you won't see headlines here and there. That's going to happen.

Speaker 3

But I would honestly say the competitive intensity Robin and I have talked about it running across these regionals, we ran across them a lot more 2, 3 years ago than we are today. And I think that comes from the fact that this is a very tricky industry to lend into and you have to be specialized and very focused on it. And I think the tourists in the industry have come and gone and some of them have had a rough experience. And so having the dedicated focus on cannabis, having both the top down and the bottoms up operating experience, and having 5, 6, 7 years of history in the industry is a really valuable asset for us. And those without that type of specialization are generally taking a more cautious approach.

Speaker 5

Got it. Thank you.

Operator

Thank you. And I'm showing no further questions. So with that, we would like to thank you for participating. This does conclude today's program and you may now disconnect.

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